TRANSPORTATION

The cold, hard economics of electric cars points to making them in the U.S.

Saqib Rahim, E&E reporter

ClimateWire: Monday, September 27, 2010

The first of a two-part series on electric cars.

When Kevin Czinger wanted to start building electric cars, he knew where to begin: China.

His company, Los Angeles-based CODA Automotive, had a blueprint for an electric sedan with a 100-mile range. His engineers had designed a lithium-ion battery with electronic "brains" that maximized its range while keeping it as cool, and safe, as possible.

If he could produce this battery on the cheap, an affordable electric car was within reach. But he had nowhere to build it.

It was 2008, and no one in the United States was making lithium-ion batteries in mass volumes -- not the kind that could power a car, anyway, and certainly not the high-performance battery needed for the CODA.

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Every day, Americans used smaller versions of the batteries in their cell phones, laptops and power tools. Virtually every one of them came from Asia.

So CODA signed an agreement with Lishen, a government-owned company in China. Under the deal, CODA would lease out a share of Lishen's assembly lines. China already had lower costs, but Beijing sweetened the deal with breaks on rent and utilities.

CODA would import the battery's electronic "brains" from America, combine them with the battery cells in China, then ship the finished "battery pack" to California and build it into a car.

Lishen, meanwhile, would get a closer look at the advanced technology, a boost in the global race for the electric car. More recently, though, Czinger says, times have changed.

The U.S. Rust Belt beckons

Chinese labor has gotten pricier. The Chinese currency is expected to appreciate, making U.S. goods more competitive. Fuel prices have ticked upward -- an unattractive prospect when shipping batteries that weigh hundreds of pounds.

So CODA, expecting a rich U.S. market, has looked to the Rust Belt. In a recent application to the Department of Energy, it requested a loan to build a battery plant in Ohio. Its reasoning: For electric cars that run on American roads, it just might make the most business sense to build them in America.

Czinger said CODA's application to DOE shows currency, fuel and labor prices changing. "When you do that, very quickly you see the cost differential between an Ohio facility and a facility in Asia shrink, and basically more or less disappear, when you start adding in additional transportation cost, particularly for larger, heavier items like a battery system," he said.

CODA says it's done the math. In 2014, if exchange rates stayed the same, it estimates it would cost 22 percent more to build the battery in the United States than in China. But in the long term, other costs would add up: the cost of borrowing money, higher wages and currency changes. When it all shakes out, building their battery in the United States would cost only 4 percent more than doing so in China.

CODA isn't the only firm betting the United States will be a smart place to build car batteries. A recent burst of federal funding has sown seeds for the first U.S. plants that can produce them at scale. The recipients tend to admit they wouldn't have had the money to build the plants without federal help. But they also claim that the investments will last, because the basic economics of electric cars favors making them in the United States.

Will the seeds of federal stimulus money grow?

That's a critical argument for the White House. In July, President Obama and Cabinet members fanned out to a half-dozen manufacturing sites for electric cars, batteries and their parts. They touted the promise of "green jobs" that employ the middle class, benefit the climate and make the United States competitive at the same time.

Obama spoke at a groundbreaking ceremony in Holland, Mich., where a battery-manufacturing plant was being built for Compact Power Inc., a subsidiary of Korea's LG Chem. The plant will produce batteries for the Chevy Volt and electric Ford Focus. He claimed that a few years ago, U.S. firms made 2 percent of the world's batteries for electric and hybrid cars, but thanks to federal investment, the United States is on track to produce 40 percent by 2015.

"For years, we've heard about manufacturing jobs disappearing overseas. You are showing us how manufacturing jobs can come back," he said.

As the global electric-car industry forms, several trends are taking root. The cars remain too expensive for the mass public to buy, mostly because of the batteries. Yet many countries have pegged batteries as an area of global competitiveness, since oil security and climate trends suggest there will be demand.

To secure an advantage in the electric-car industry, several countries have boosted domestic research, manufacturing and consumer incentives. Korea, Japan and China -- the world's heavyweights in lithium-ion battery production -- are among the leaders, but because car batteries aren't exactly the same as the cell-phone variants, the United States isn't thought to be at a permanent disadvantage.

U.S. companies say the manufacturing was going to take root somewhere, whether domestically or abroad; thanks to federal incentives under the Obama administration, industry observers say, there will be substantial battery manufacturing on U.S. shores.

"This is not a question of will someone build batteries, but of whom," said Chris Paulson, CODA's director of strategy, in a July interview.

Now, the question is whether the White House has fertilized a burgeoning industry or squandered resources on the next industry destined to move offshore. Both inside and outside the business, observers think the signs point to the United States.

Jobs are in the cells

A123Systems Inc., a battery maker whose basic technology started at the Massachusetts Institute of Technology, is counting on it. The company has already opened a lithium-ion battery plant in Livonia, Mich., just outside Detroit. Last August, it received a $250 million DOE grant to build battery parts and cells in Romulus and Brownstown. Now, it's applying for a $230 million loan under the same DOE program that CODA is pursuing.

Jason Forcier, the company's vice president for automotive solutions, likened batteries to another auto component. "Seats are heavy, they're big, and they're expensive from a cost perspective," he said.

The Coda battery system. Photo courtesy of CODA Automotive Inc.

Forcier pointed out that car seats are made close to where the final car is produced, and they get to the assembly line in the same hour they're plopped into the car. They are unwieldy to transport and pricey to store. So even though they're cheaper to make abroad, no one bothers. "You can't be competitive by importing seats," he said.

A similar trend has taken root in other clean-energy industries, like wind energy: Hard-to-transport parts, like the tower and turbine blades, tend to be built near the eventual site. Less awkward parts, like the gearbox and nacelle, tend to be built farther away, often abroad.

That equation holds even if fuel is somewhat cheap. If the price of transport goes up, it becomes even more sensible to build more of a clean-energy technology in its final market.

Another reason to build at home: Batteries don't get much cheaper when made abroad.

Oliver Hazimeh, director of the global e-mobility practice at PRTM, a management consulting firm, said 70 percent of the value of an electric-car battery is in its cells, the circular or rectangular units in the battery whose innards store and release energy.

Since these cells have been built for decades, they don't take hyper-educated technicians to assemble: Labor makes up only 7 to 9 percent of the battery's final value, Hazimeh said. Most of the production cost comes from the components that go into the cell, such as the anode, cathode and separator -- not the work to put them together.

China's famous advantage, of course, is its cheap labor. So "the labor cost advantage of a country like China will not be a significant driver of cost advantage," Hazimeh said.

Labor costs will rise in China

In the long run, manufacturers see three main electric-vehicle markets: the United States, Europe and China. Companies have different guesses as to which market will ripen first, and that's evident in where they choose to set up shop.

Take the case of Johnson Controls Inc., another major recipient of American Recovery and Reinvestment Act funding for batteries. According to Alex Molinaroli, the company's president for power solutions, it already had plans to build factories in the three major markets.

China's low labor costs were tempting. But when the multidecade life of the factory was considered, he said, the math shifted. "When you look out that long, you start seeing economics change," he said.

Labor costs were likely to rise in China over time, they reckoned, and if oil got more expensive, it would become costly to ship Chinese production to America. Over time, the "Chinese advantage" would shrink.

"A lot of the advantages they have today are probably not sustainable over a long period of time, so chasing a little labor is probably not in our best interest," he said. "That would be a benefit, maybe, but that wouldn't be the reason we go put a plant somewhere."

Now Johnson Controls plans to use the U.S. plant for the U.S. market. It will serve Europe and China from its plant in France, at least until China's domestic market reaches the size to justify its own plant. While companies have already made their bets for the short term, analysts say that in the long run, batteries will be made wherever they're bought.

That's not a trivial point, since markets for electric cars remain unestablished. The United States has offered a $7,500 tax credit for those who buy a plug-in car; China offers a slightly steeper incentive. But the cars haven't yet arrived -- the models designed for mass consumption don't reach the public until next year.

The CODA is scheduled to debut slightly earlier, at the end of this year, in California. Czinger said the first few models will have Chinese-made battery packs, with the final assembly in California.

Between the low-cost manufacturing and the $7,500 tax credit, he is betting consumers will be captivated. Czinger comes up with a round number -- the "first 10,000 stories" -- to imagine how the first 10,000 electric vehicle drivers, in CODAs or other vehicles, will help the technology catch fire in three to five years.

"Those 10,000 people say, in different stories, but one of the stories is, 'I get up in the morning, I unplug my car, I take my kid to school, I go to work, I pick up a loaf of bread, go pick up the kid from soccer, come home, plug the car back in. I'm not using an ounce of oil, I don't have to stop at a gas station. This is really cool, I'm connected,'" he said.

Czinger said that an early version of the cell phone, the Motorola StarTAC, cost $2,500 at the beginning. Within three years, it cost $250.

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